Critical Thinking on Money, Finance, and Economics

Crisis Update: 10:11am

The good news is that there has been no crash. Neither yesterday nor today did the market open already down 5% or much worse. That means activity is fairly orderly and true panic has not set in. That doesn’t mean things are good or it won’t happen another day, it just means the system continues to function for now. The LIBOR rate doubled overnight to over 6%. If you recall from Jon’s post Watching The Credit Crisis, LIBOR is the rate at which banks lend to eachother. The soaring rate means that banks are hoarding cash and not supporting eachother, while those banks in need of funds are willing to pay nearly any price. The Fed injected $50 billion of liquidity overnight to help stabilize this activity, we will see to what effect. Speaking of the Fed, their regularly scheduled FOMC meeting is today and their statement (2:15pm ET) will be more interesting than the action. It may calm markets or upset them. We’ll see.

EDIT 10:50am ET: It turns out the Fed injected another $20 billion last night in a second action, making the total $70 billion. It appears markets are waiting for news on AIG to decide what to do.

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Can you help me with a your statement “The Fed injected $50 billion of liquidity overnight to help stabilize this activity, we will see to what effect.” Pardon my ignorance, but what does this mean that the Fed injected billions? Does this come from the Fed’s petty cash fund or do they just print more money?

Thank you for pointing that out. We forget that our lingo isn’t always widely known. Readers should always challenge terminology.

The Fed’s petty cash fund typically just buys lunch and booze, probably more of the latter these days. Actually, what the Fed does to “inject liquidity” is LEND cash to banks in exchange for collateral. A bank would exchange treasury bills for cash to give it liquity and have to buy it back in a set period of time. Given this crisis, the Fed has relaxed its standards for collateral. Where it used to only accept U.S. Treasuries, it now accepts mortgages and other paper- probably even dry cleaning receipts these days.

About

Brett Spurr has been on and around Wall Street since the age of 19, nearly half a lifetime ago. He helped make investment decisions for a $15 billion mutual fund complex. While locking horns with CEOs was fun, he now runs a personal financial planning firm helping individuals navigate their financial lives. Brett is a CERTIFIED FINANCIAL PLANNER ™ certificant and investment manager by day and a full-time geek who delights in debating all things financial or economic.

Karl Mamer is host of The Conspiracy Skeptic podcast, a 12-part look at conspiracies of today and the not too distant past. Karl is also the world’s greatest living proponent of Franglais. He also likes to bait Nigerian Bank Scammers and hosted his own podcast about teaching English in Seoul, South Korea. Karl lives in Toronto, Canada and works as a senior technical writer to pay the bills.

Julio Guardado is a former tech CEO who after surviving a tech start-up during the dot com bust decided to join the dark side and become an investment banker. While wining and dining CEO’s (we call it “locking horns”) is great, he enjoys getting inside their heads and companies even more. Julio also runs RV Investor, a web site that specializes in the recreational vehicle industry. Julio lives in Silicon Valley.

Jon Blumenfeld has been on and around Wall Street since 1989, as a trader and researcher in interest rates and their associated financial products. Most recently he was an Interest Rate Strategist at Bear Stearns and Co., where he was named to Institutional Investor Magazine’s All-America Fixed Income Research team for Interest Rate Derivatives in 2007.

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